American Recovery and Reinvestment Act

A.Under the American Recovery and Reinvestment Act of 2009, the federal government is undertaking a large fiscal stimulus, about $800 billion, or more than 5% of GDP, to be spent over the next several years.

Using the AS/AD framework, describe the rationale and likely effect of this fiscal stimulus program. How large an effect on GDP would you expect the stimulus program to have, and why?

Consider and respond: Every dollar of government purchases of goods and services generates employment, so what the $800 billion in federal stimulus money is spent on does not matter.

B.Using the Phillips Curve approach, describe why the inflation rate increases when the unemployment rate decreases?

What is the Taylor Rule? describe why the Federal Reserve would increase the real interest rate if the inflation rate rose.

C.Niall Ferguson, a financial historian and professor of history at Harvard University, recently wrote an article for the Financial Times, entitled "A Greek Crisis is coming to America." http://www.ft.com/cms/s/0/f90bca10-1679-11df-bf44-00144feab49a.html Summarize briefly the issues contained in the article. Is America at risk of a debt crisis ala Greece? Why or why not? Will the "financial crisis" narrowly defined end soon? What about the broader forces at work? How can the US handle the rising fiscal burdens associated with desirable spending but also with rising deficits and debt?